【09.05.06The Australian】China will save the day for Australia, says RBA chief

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China will save the day for Australia, says RBA chief

Scott Murdoch | May 06, 2009
Article from:  The Australian

http://www.theaustralian.news.com.au/business/story/0,28124,25435536-643,00.html

THEReserve Bank has refreshed the prospect that traditional safeguards ofChina and commodity prices will lead Australia's recovery fromrecession in the next year.

The bank met theexpectations of the financial markets yesterday by leaving interestrates on hold at 3 per cent despite some economists expecting a25-basis-point cut.

The RBA has cut 425 basis points from the official cash rate sinceSeptember last year, taking rates from a peak of 7.25 per cent to thecurrent rate, which is a 50-year low.

The majority of economists expect rates to be pared back to 2 percent before the end of the year, but the RBA indicated futurereductions would not necessarily be automatic.

In a statement, RBA governor Glenn Stevens said the Australianeconomy and the world economy as a whole were front-loaded withstimulus through the co-ordinated rescue package led by the G20.

"The global economy contracted further during the first few monthsof this year. While the near-term outlook remains weak, there arefurther signs of stabilisation in several countries," Mr Stevens said.

"The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little.

"The considerable economic policy stimulus in train in mostcountries should help contain the downturn and support an eventualrecovery."

The Australian dollar strengthened on the rates decision, given thatthe move to stay on hold maintains the differential between Australiaand US, where the official interest rates are virtually zero.

The currency moved from US73.80c up to US74.20c before it was sold off slightly. At the local close it was at US73.96c.

The interbank futures market is now tipping that rates could stay on hold for the rest of the year.

UBS economist George Tharenou said the RBA's emphasis on Chinashowed the central bank thought the return of the world economicsuperpower could propel Australia's prospects in the next few years.

"We think the RBA is seeing some signs of the outlook improvingglobally and stability in several places," he said. "They are placingmore weight on China given our trade experience and they are seeingimprovement in commodity prices.

"There are signs China is picking up and if there is the samepick-up in commodity prices then that would give a direct boost to theincome side of the Australian economy."

In the statement, MrStevens said world markets had gained slightly in confidence andsentiment but there were still concerns about the strength of corporatebalance sheets.

"Conditions in global financial markets remaingenerally on a path of gradual improvement, with equity prices offtheir lows, term spreads declining and capital markets reopening," hesaid.

"Confidence remains fragile and balance sheets remain under pressure from the effects of economic weakness on asset quality."

Economistsinterpreted Mr Stevens' comments as foreshadowing further action by themajor US banks to restructure their balance sheets, after the resultsof the Government's stress tests of 19 major financial institutions arepublished on Thursday.

"Now I don't want to overplay it andI'm sure the RBA doesn't either. There are certainly some very seriousnear-term risks, and as the bank points out, we need to see ongoingprogress in balance sheet repair, particularly for US banks," Icapsenior economist Adam Carr said.

"The RBA has already cutrates aggressively to deal with the fallout from these issues, and wehave substantial stimulus to deal with.

"Prior to even seeingthe maximum impact from this stimulus, we are starting to see the greenshoots of recovery in both the global and domestic economy."

JPMorganchief economist Stephen Walters said while the RBA had indicated ratescould remain on hold, the expected rise in unemployment would be one ofthe main drivers of the bank's future decisions.

"Board members probably enjoy having the option of delivering modest interest rate relief as unemployment soars," he said.

JPMorgan has forecast unemployment will reach 9 per cent, which would mean a million people out of work in Australia.

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